Monday, 5 September 2011

Is it milliseconds or days that count?

In 1986 the financial sector's Big Bang saw the explosion of the industry. It was the end of October 1986 when the Stock Exchange Automated Quotation system replaced the trading floor. This screen-based quotation system was used by brokers to buy and sell stock rather than meeting face to face. It's been the technological advances in the sector that has kept it competitive and continues to do so.

Work has just got underway on the Hibernian Express a 6000 mile fibre optic cable that will cost over £300 million and is being justified by the fact that milliseconds will be saved in trading transactions providing the edge that companies need to ensure they stay competitive.

However, increasingly it is not just the huge infrastructure projects that are necessarily giving the edge, but easily accessible and free platforms. Analysts at Derwent Capital Markets have launched a £25m fund that makes its investments by evaluating whether people are generally happy, sad, anxious or tired, because they believe it will predict whether the market will move up or down. How do they do that? Well it's Twitter. The millions of tweets posted on Twitter are being analysed by their hedge fund managers in conjunction with a research team headed by Professor Johan Bollen, they have developed a predictive modelling technique for the Dow Jones with 87.6% accuracy.

Paul Hawtin, Derwent's founder and fund manager, has an exclusive contract with Bollen to use his technology. Mr Hawtin told the Sunday Times "Investors have always accepted that markets are driven by sentiment, mainly fear and greed. When people are greedy the markets go up and when they are fearful they go down.

"When sentiment dropped, and people tweeted about feeling tight on money, were worried or anxious, the markets would crash two or three days later."

This is not the only tool on the market, but increasingly small houses are looking at investing in social technologies at a fraction of the price of large infrastructure projects and in some cases predicting market shifts far earlier than the milliseconds that may be won by the Hibernian Express.

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